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Nerida Conisbee: Shouldn’t we already be in recession?

An interesting global study was recently released by the International Monetary Fund (IMF,) which looked at how sensitive countries were to monetary policy based on their housing markets.

Australia came out as one of the most sensitive in the world.

Why then has our economy remained so resilient and can it continue?

It can’t continue and rates need to be cut sooner or later, as many of the factors that have contributed to us being resilient to higher rates are starting to wear thin.

The IMF outlined five reasons why monetary policy works best in some countries because of the structure of their housing markets.

Australia comes out as very sensitive to monetary policy for all of the reasons.

We have one of the lowest proportions of households on fixed mortgages in the world, we have high loan to value ratios, we have high levels of household debt, our housing supply is constrained and although there is no data, it is possible our homes are overvalued.

Higher interest rates should be hitting us much harder by now.

Obviously, economies are complicated and there are other factors that have kept us out of recession.

However, three of the housing linked monetary policy impacts are accelerating and this could lead to a sharp, quick change in our economy’s performance.

Many people are now struggling with mortgage payments, household savings are being eroded and affordable housing options are reducing even further.

The potential for a mortgage cliff was well documented, yet never occurred.

In addition to very few mortgages being fixed in Australia, one main reason is that banks are well capitalised and were therefore in a position to assist mortgage holders through the transition from fixed to variable.

The mortgage market is also very competitive, making banks more motivated to retain clients.

Most struggling mortgage holders coming off fixed loans were offered interest only loans, extended loan terms or debt consolidation.

However, there is a point at which this no longer works.

Although not possible to quantify exactly, it is already impacting investment property and holiday home ownership and is likely spilling into owner-occupied housing as well.

Constrained housing supply in Australia also makes monetary policy more effective.

It is more difficult to save money by moving to a cheaper home as rates rise if there is a limited supply of cheaper homes.

Again, this has been somewhat offset up until now by movement of people out of expensive locations to cheaper markets.

Brisbane, Adelaide and Perth have seen high levels of migration, in part due to their affordable housing, particularly on the urban fringe.

However, affordability is reducing in these areas, partly due to rising demand but also because of limited supply, as a result of rising construction costs.

High levels of savings have also offset sensitivity to interest rate rises.

Australia does have very high levels of household debt, but we also saved a lot during the pandemic.

Those savings, however, are increasingly being eroded and our household savings rate is now at a 17-year low.

At some point, many households will spend through savings and this sensitivity to rates will impact our economy.

As the IMF paper stated, house prices, as a macrocritical asset price, offer early clues as to where households are feeling the pinch of monetary policy.

Late last month, Neoval data on house prices continued to show a sharp divergence in capital city growth.

While Perth, Adelaide and Brisbane are continuing to show strong growth, we are now seeing growing weakness in Melbourne and Hobart.

Both Victoria and Tasmania may already be in recession.

Ideally, rate cuts are implemented sooner rather than later to prevent the rest of the country following.

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Nerida Conisbee

Nerida Conisbee is the Chief Economist at Ray White.